The Effect of Government Spending:

Spending multiplier = 1/(1-MPC)

5. If your MPC = 0.6 and government spending (G) increases by $800.

What will happen to the equilibrium income?

The Effect of Taxation:

Tax Multiplier = -MPC X Spending Multiplier

Problems:

6. If the MPC = 0.8 and taxes go up by $1000, what will happen to the equilibrium income?

7. Fill in the following table and answer these questions based on:

MPC = 0.6, I = $500, G = $700, and T = $500

1. What is the equilibrium income?
2. What are the injections (G+I) and leakages (S+T) at this income?
3. What will happen to equilibrium GDP if government spending goes up to $400? If Investment goes up to $400 instead?